New Lease Standard 101: 5 Keys to Successful Adoption of Lease Standards
More than a year has passed since the Financial Accounting Standards Board (FASB) issued the long-awaited Accounting Standard Update (ASU) for leases: ASU No. 2016-02—Leases (Topic 842). Many organizations are still in the dark about how to prepare for the ASU’s new guidance, but time is ticking as the effective dates are approaching rapidly.
Non-public entities are granted an additional year, meaning the standard will take effect for fiscal years beginning after December 15, 2019 (January 1, 2020, for those on a calendar year). However, the standard will take effect for fiscal years beginning after December 15, 2018, (January 1, 2019, for those on a calendar year) for public entities and certain non-public entities with outstanding bond debt. For businesses presenting multiple years in the financial statements, periods as early as next year must be accounted for using the new guidance.
Following these steps will substantially ease the pain and greatly reduce the risks that are bound to arise from adopting the new lease standard.
- Create a task force. A group of individuals dedicated to overseeing the preparation for this new standard will be crucial to a successful transition. This task force should be responsible for creating the action plan, managing each step, ensuring the plan stays on track, and holding those involved accountable. The task force should meet regularly and communicate how the preparation for the new standard is progressing, identifying potential problem areas as they come up and developing solutions to streamline the leasing process in the future.
- Gather the data. There is no way to understand how much work needs to be done until a full inventory of currently existing contracts is taken. Therefore, the task force’s first step is to compile and organize the data for all leases in existence. Some businesses may have a single manual spreadsheet that tracks this information, others may have complex lease-tracking software, and still others unfortunately may have lease agreements spread throughout various departments with no central source of information. Regardless, compiling data will ensure the task force understands how many leases exist, the dollar value of those leases, and whether they were previously classified as operating or capital.
- Assess the impact. As data is gathered, task force members should familiarize themselves with the actual changes in the new lease standard. This will ensure the new standard’s impact on currently existing leases is understood. The impact of the new standard will be twofold—first, on the actual financial statements. The task force should understand how the new operating leases will appear on, and amortize off, the financial statements and how this could potentially affect debt covenants. The second impact will be on the actual decision-making process for obtaining leases. Given the effect on financial statements, management may come to alternative decisions regarding purchasing or leasing a future asset.
- Centralize the process. The key to making appropriate future decisions will be having a centralized process for leasing. The task force will need to develop appropriate policies and procedures for personnel to follow. The task force should dictate where lease information will be maintained, what information will be collected, how often lease information will be reviewed (e.g. modifications of lease arrangements), who will make the decision to enter lease agreements, and how this information will be communicated within the business.
- Communicate the results. Once the above steps have been completed, the information obtained, and the new policies and procedures implemented, the importance of adhering to the new lease standard should be communicated throughout the business. Employees across all functions of the operation should understand how the new standard will affect the business. The stakeholders of your business will also need to know about the effect of the new standard, as the first year of adoption will greatly impact the financial statements.
If your resources are stretched thin, PYA offers project management services related to all of the critical steps discussed above to help ensure a smooth transition to the new lease standard. If PYA can help with this transition, contact an executive below at (800) 270-9629.